Section 196C of ITA, 1961 : Section 196C: Income From Foreign Currency Bonds Or Shares Of Indian Company

Explanation using Example

Imagine a company in India issues Global Depository Receipts (GDRs), which are bought by a non-resident investor. When the company declares dividends on these GDRs, or the non-resident investor decides to sell the GDRs and earns a long-term capital gain, the company or the intermediary handling the sale is responsible for deducting income tax at the rate of 10% from the payment made to the non-resident investor.

For instance, if the non-resident investor earns a dividend of INR 100,000 on the GDRs, the company will deduct INR 10,000 (which is 10% of the dividend) as withholding tax before remitting the balance to the investor. Similarly, if the investor sells the GDRs and makes a long-term capital gain of INR 500,000, the entity facilitating the sale will deduct INR 50,000 as tax.

However, if the dividends are of the type that the company has already paid dividend distribution tax on, as covered under section 115-O, then no tax should be deducted at source on these dividends when paid to the non-resident investor.